French Energy Policy: Politics over Economics?

As the French parliamentary and presidential elections approach (spring 2007), most economic issues are becoming political issues-particularly for energy, where politics trumps economics. In Parliament the energy debate is focused on two main issues: the legal conditions for a merger between Gaz de France (GDF) and Suez, and the proposed authorization to allow commercial and industrial customers to return to protected electricity tariffs. Furthermore, the need to build new generating capacity is critical, even with Electricité de France's (EDF) decision to build a 1,600 megawatt nuclear plant and some peak generating units.

* The proposed Suez and GDF merger, dropping the state's share to 34 percent, will be made possible legally by Parliament; but Suez shareholders will make the final decision based on financial criteria.
* Once the European Commission's objections are satisfied, the merger could enhance gas and electricity competition in the French and Belgian markets.
* However, development of wholesale electricity markets in France will stagnate if commercial and industrial customers pay protected rates. Energy traders and new entrants see the move as reducing business potential.
* Maintaining regulated tariffs below market prices discourages investments by incumbents and new entrants, and increases regulatory uncertainty and the risk of more volatile wholesale prices. The instability of such a situation could lead to further politically driven interventions in the market.
* France's electricity system needs new generating capacity, especially to meet peak demand. Although state-controlled EDF could be responsible for most investments, regulated tariffs will weaken its financial strength.
* Political agendas send the wrong signals to French commercial and industrial customers and only delay these customers' adaptation to higher energy prices.

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